The simplest way to invest may be the best

What if all you really need is a total stock market index fund and a small-cap index fund

Amid all of the slick presenters at the American Association of Individual Investors annual conference in Orlando last weekend, Sheldon Jacobs stood out like a lighthouse in the fog.

It wasn’t just the 82-year-old’s white hair, his tan or his lack of audiovisual aids.

Instead, it was that while almost every other idea about easing people’s financial concerns presented at the event ultimately involved adding complexity to a portfolio, Jacobs advocated portfolio simplification.

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Jacobs was the founder of the No-Load Fund Investor newsletter, which he ran for a quarter-century, and which was consistently a top performer. He was an engaging personality in the investment world throughout that time. He sold the newsletter in 2004 (Mark Salzinger has since then continued Jacobs’s legacy and solid record), and has spent his retirement traveling, investing, speaking and writing “Investing Without Wall Street,” a book he published last year. He has reduced his appearances and does fewer interviews, which is another reason why his philosophy stood out in an event filled with impressive speakers who are at the top of the financial food chain.

What Jacobs hasn’t done is stay on top of the names of the best funds or who the hot managers are, and he now thinks most investors could benefit from doing the same. “When I was younger, what interested me was finding the best funds and the best fund managers, and investing in more good funds,” Jacobs said in an interview. “Now that I am retired, what interests me is making it simpler and easier.” And he pointed out, he’s probably not alone in that desire: A lot of people probably “wish that managing their money was simpler and easier, but every day they are being told that the best things they could do for their money would make the process harder and more complicated.”

Jacobs blames much of the problem on the media and the 24-hour news cycle, where the need to produce content “means you can’t just say ‘Stay diversified’ every time you talk about what is happening with the market.” The financial-services community shares the responsibility, he said, because they are constantly creating new products, and each “comes with a sales pitch that makes it sound like you are really missing out if you don’t give [the new product] a try.”

But he also placed responsibility on investors who are their own worst enemy when it comes to managing their money in ways that are straightforward and simple. Indeed, if you talk to investors and advisers, one common trait is that investors make their portfolios more complex while they are in the earnings and accumulation phase of building a nestegg, but then want to scale back and make everything much less complicated in retirement.

They might well be better off going for simplicity all along, Jacobs said.

“Everybody knows you should buy low and sell high, but it’s pretty hard to do,” Jacobs said. “By making it simple — by coming out and saying what is truly important to you and what is not important — you come up with a strong focus.”

Jacobs’s suggestion at the AAII conference was that investors could handle the equity portion of their portfolio with just two well-diversified mutual funds; specifically, he recommended using a total stock market index fund, and a small-cap index fund, with the money split four-to-one between the two.

“You will not find a simpler solution that works well,” he said.

Oh, you can get more complicated than that if you want, Jacobs said. You could split the total market holdings between a capitalization-weighted index — one that allocates more to the largest names in the index — and a fundamental- or equal-weight index that reduces the importance of the big names. You could use the two funds as core holdings and then do some exploration around them with funds that invest in sectors or industries you like, or you can allocate more money internationally, Jacobs said.

“But you can be average to above average just ding the very basics and not doing anything more,” Jacobs said. “And you have to remember that you are not graded the way the professionals are — or tracked the way I was with the newsletter — where it’s so important to be above-average or to be the best. … If you are an average investor and you or your funds are in the 52nd percentile instead of being above average or at the top of the charts, that’s okay if you are on the pace to reach your goals. It’s not a competition.”

But what about the years of evaluating funds, of telling people to be diversified, of helping them find more funds to build the portfolio?

“I wasn’t immune to it,” Jacobs said. “That’s what people wanted, and it’s what we gave them, and I think a lot of people still want that, they want to know they have the best funds in all of the different boxes.

“But there comes a point in your life where that’s not really what you want any more,” he added, “and if you know that is coming, well, it’s okay to simplify now. … You don’t have to have the best portfolio in the world, divided up into the perfect allocation and always rebalanced at just the right time. You just need to have a portfolio that does what you expect, that you can manage at every stage in your life; too many people these days make investing complicated, and that’s not what average investors really want, and it doesn’t have to be that way.”

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